Big Picture: Supply vs. Demand

Why have residential real estate prices experienced an unusually rapid increase in last few years? That’s the big question that we all want the answer to, right? There’s one argument that goes something like this:

There just aren’t enough homes for everyone. People are moving to the Puget Sound at a rapid pace, and homebuilding just isn’t keeping up. Furthermore, even as more people move here, the size of households keeps shrinking, meaning that demand is increasing even faster! So it makes good sense for home prices to soar and rents to increase, because people have far less choices about where they will live than they did ten or twenty years ago.

Indeed, this would be a pretty compelling argument, if it were backed up by the facts… but is it? I dug through the Census archives to find the answer.

As it turns out, most elements of the above argument are true. Population is indeed rising at a fairly rapid pace. From 1960 to 2000, King County population surged from 935,014 to 1,737,034—an increase of 86%. During that same time period, the average household size dropped 21%, from 3.04 to 2.39. These two statistics combine to give us a 136% net increase in the total demand as measured by the number of households (307,759 to 726,792).

On the supply side of the equation, the number of “housing units” also experienced a greater than two-fold increase (122%), from 333,959 in 1960 to 742,237 in 2000. Of course, 122% is not as large of an increase as 136%, so you can see that from 1960 to 2000, home building did not in fact keep up with demand. This caused the percentage of occupied housing in King County to steadily increase from 92.15% in 1960 to 97.92% in 2000.

This is all very interesting, and so far would appear to back up the “not enough housing” argument. Of course, it is said that the best lies are those that contain the most truth. The real boom in King County home prices didn’t start until after the year 2000. So let’s compare 2000 to 2005*, using numbers readily available directly from the Census website.

In 2000, there were 742,237 housing units available to 726,792 households, for an occupancy rate of 97.92%. In 2005, there were 792,682 housing units available to 747,157 households, dropping the occupancy rate to 94.26%, a level not seen since 1980. Whoa. It would appear that during the five years of most aggressive home price growth, home building has more than kept up with increased demand.

Here is the complete data table for 1960 to 2005:

Year Population Households Hshld Size Hsng Units % Occ.
1960 935,014 307,759 3.04 333,959 92.15%
1970 1,159,369 391,759 2.96 424,837 92.21%
1980 1,269,898 497,263 2.55 525,562 94.62%
1990 1,507,305 628,044 2.40 647,339 97.02%
2000 1,737,034 726,792 2.39 742,237 97.92%
2005* 1,755,818 747,157 2.35 792,682 94.26%

It should be noted that there are many different sources available for current (2005) population estimates. However, even under the most aggressive of these estimates, the occupancy percentage still declines from 2000 to 2005 (down to at least 1990 levels). I chose to use the data on the Census website since it was most directly comparable to previous Census data, and it is the only source I have been able to locate that contains an estimate of the average household size and number of housing units for 2005.

So what does this all mean? I think at the very least it shows that home building in King County has kept up with demand during the recent housing boom. It seems most likely that building has even surpassed demand by a non-trivial amount. If you have data that shows otherwise, I would love to see it. However, after considering the available data, I believe we can safely bury yet another unfounded argument that attempts to justify today’s housing prices.

*2005 data based on the 2005 American Community Survey, which “is limited to the household population and excludes the population living in institutions, college dormitories, and other group quarters.” Therefore, while total population is likely to appear low when compared directly to Census data, the number of housing units is also scaled down accordingly. Since this post is about housing supply for “households,” the exclusion of group quarters does not affect the final “percent occupancy” calculations.

(US Census Bureau, 2000, 2005)

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.